Friday, January 2, 2015

Fred Thompson: Stuffing Oregon's Kicker

There are 12 Christmas trees in Oregon for every person, more
than in any other state. That’s one way we are special. Another is our system
of state and local public finances, where, by many measures, Oregon is an outlier.Generally, special also means
better.

Nevertheless, Oregon’s system of state and local finance has
one difference that isn’t particularly praiseworthy: the so-called kicker law,
which requires the state to return actual revenues in excess of the annual
budget forecast to taxpayers. No other state in the country has anything quite
like it. Oregon’s kicker was justified as a means of keeping the legislature
from rolling over revenue windfalls to future budgets, thereby unsustainably
increasing state spending. This was and is a reasonable concern, but the kicker
was and is an ill-conceived fix to this particular problem. Rather, it is fundamentally
inimical to the very worthwhile goal of smoothing out state and local spending,
which calls for setting revenue growth in excess of long-term trends aside for
a rainy day.

Oregon’s Total
Revenue and Total Expenditure

Oregon’s kicker law
dates back to 1979. The voters overwhelmingly ratified the law in 1980, but the
first actual kicker rebate didn't actually occur until 1985. During the 90s a surprisingly
good economy generated kicker rebates nearly every biennium: 1995, 1997, 1999, and
2001. The only subsequent rebate occurred in 2007, a personal income tax rebate
of $1 billion. That year the legislature diverted the business-tax kicker to
the state’s rainy day fund and in 2012 Measure 85 assigned it to the public-school
fund for keeps.

The dearth of personal-income-tax kicker rebates so far this
century is not entirely due to a disappointing economy. That is the main reason,
of course. But Oregon’s recovery has by most measures outstripped that of the nation
as a whole, especially with respect to state revenue growth.
Consequently, it appears that the state also highballed the official revenue forecast.
In so doing, its actions were entirely consistent with the recommendations of
the 2008-9 Legislative Task Force on Comprehensive Revenue Restructuring. The
Task Force aimed at making Oregon's tax system more stable and adequate. It found
that the
secret to stability and adequacy lies in stabilizing spending growth at a
sustainable rate and in using savings and short-term debt to smooth out revenue
volatility. The Kulongoski administration put these findings into place via its
so-called reset budget. Then, so long as the administration remains committed
to the reset-budget’s long-term spending targets, funds are automatically
generated for Oregon’s rainy-day fund and/or to pay down its debt (the measures
also allowed for automatic borrowing if revenue fell short of the spending
target).

This year it probably will not be possible to avoid a kicker
rebate without legislative action. Despite the best efforts to avoid such an
outcome, actual revenues look to be running ahead of the forecast. Not
surprisingly kicker repeal is once again on the legislative agenda. (Of course,
the legislature can always put off the distribution of a kicker rebate by an
emergency vote, as it did in 1991 and 1993, without actually repealing the law.)

Moreover, some legislators are concerned with the current
administration’s apparent inclination to discard the reset budget: reset
principles are not highlighted in the 2015-17 budget proposal and the medium-term
fiscal planning unit in the Department of Administrative Services that
formulated the reset budget and put it into place has been dismantled. This is
a potential threat to the state’s long-term fiscal stability and, perhaps, also
underscores the ongoing need to enact the Task Force’s recommendations for
improvements to Oregon’s fiscal system, including reform of Oregon's personal-income-tax
kicker, into law.

Senator Ginny Burdick, Chair of the Senate Finance and
Revenue Committee, is the key to these reforms. She served on the Task Force
and has a longstanding commitment to both fiscal stability and kicker reform. Interestingly,
California, Oregon’s neighbor to the South, recently voted Proposition 2 into
law. Proposition 2 amends the California Constitution to require that the
Governor make mid-term spending and revenue targets part of the state budget
process, requires the state to set aside revenues each year – for 15 years – to
pay down specified state liabilities, and substantially revises the rules
governing the state’s rainy day fund. In other words, California’s legislature
did pretty much what Oregon’s has, so far, not done with respect to kicker
reform. They referred a measure aimed at making state and local spending
sustainable to the citizenry. On November 4, 2014, 70 percent of Californians voted
in its favor.

4 comments:

When I hear about the possibility of the personal kicker being paid, it's usually described as causing a cash crunch. There's an implication that the kicker isn't budgeted, therefore the funds need to be made up somehow. How does that work if by definition the kicker involves revenue in excess of the budget?

Second, can you go into more detail on the idea that Kitzhaber is moving away from the reset principles? I hadn't heard that before. Who is saying that, and are they talking about actual policy changes as opposed to just personnel changes?

Returning kicker funds to PITpayers is a use of cash. Where current cash flows are negative other sources of funds must be tapped to make up the difference. In some cases (especially during the 70s and early 80s) the state made some bad sources and uses choices, but I don't know of any serious cash crunch caused by the kicker, maybe in 2002-3.

As to your second query, I don't want to burn my interlocutors. But clearly the Governor's budget topline isn't consistent with the reset target.

The Oregon Office of Economic Analysis demurs. "The combination of stronger growth and a big April bring us nearly to the kicker threshold, but not over it. To breach the threshold we would need to see exceptional growth. Yes, these jobs reports, if they are correct, are exceptional, however we have yet to see a corresponding jump in withholdings out of paychecks. Withholding today is growing faster than much of the recovery, however not quite as strong as the job numbers indicate. At least not yet. Our office is still in a wait and see mode regarding the kicker."

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